Federal Reserve officials expect the Central Bank to cut its benchmark interest rate during 2024. However, the impact of the timing and pace of cuts on borrowing costs will depend largely on upcoming inflation and jobs data.
The Federal Reserve will hold its next meeting on January 30-31. The central bank is expected to maintain interest rates at the current 5.25 percent to 5.50 percent range. However, data in the meantime could better reveal the prospects for lower interest rates.
This year began with a rush of big readings on inflation, the labor market, and consumer spending. We summarize below some of the data that could form a road map for the Federal Reserve’s decision, according to Reuters and Bloomberg:
The Consumer Price Index (CPI) jumped 3.4 percent year-on-year in December from 3.1 percent in November. Meanwhile, the base interest rate fell to 3.9 percent from 4 percent. Those readings are stronger than expected which confirmed the bumpy path of reaching the Federal Reserve’s 2 percent target.
Meanwhile, annual inflation in the Federal Reserve’s Personal Consumption Expenditures Price Index (PCE Price Index) fell to 2.6 percent in November. Hence, prices fell monthly for the first time since April 2020. Additionally, core inflation, excluding food prices, also fell. Meanwhile, energy fell to 3.2 percent, the lowest key measure of inflation since April 2021.
Job growth in December rose more than expected to 216,000 from 173,000 the previous month, despite some signs of a gradual slowdown. Additionally, the unemployment rate remained unchanged at 3.7 percent. That was due to 676 thousand people exiting the labor market, almost erasing February’s gains. Moreover, domestic employment fell sharply and the average working week was slightly shorter than in November. The employment report also included the tally of job gains last year. The economy added 2.7 million jobs in 2023. That is a sharp decline from the 4.8 million jobs created in 2022.
Overall, the latest report remains consistent with the Federal Reserve’s view that the economy can continue to grow while inflation also declines. Besides, the pace of annual wage growth rose to 4.1 percent from 4.0 percent. That is higher than what many Fed officials believe is consistent with price stability. Moreover, wage growth remains well above the pre-pandemic average and the 3-3.5 percent range that most policymakers consider consistent with the Federal Reserve’s 2 percent inflation target.
Jerome Powell, Federal Reserve’s chairman, closely monitors the U.S. Department of Labor’s Job Openings and Labor Turnover Survey. The survey provides information about the imbalance between labor supply and demand. It also details the number of job openings for each person without a job but looking for one. The ratio had been steadily declining toward its pre-pandemic level. However, in November, it remained between 1.4 and 1, higher than the 1.2 to 1 level seen before COVID-19.
Retail sales rose 0.3 percent in November, in a series of “upside surprises” achieved by the economy in 2023. Core retail sales, excluding gasoline, automobiles, building materials, and food services, also grew. It is closely aligned with economic growth estimates, forecast to reach 0.4 percent, in the latest sign of American consumer resilience. Meanwhile, consumer spending is slowing as the Federal Reserve hopes. Hence, the Fed is watching for signs that its aggressive interest rate increases are beginning to reduce overall demand for goods and services.
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